The Safety Net of Delaware

| Andrew N. Goldfarb

Blog_Falling up

Companies want to attract talented leadership, and protections for officers and directors against lawsuits can be part of the total package.

This is one reason why many businesses incorporate in Delaware—Delaware law provides significant assistance to officers and directors who are named in legal proceedings connected to their corporate role. Delaware courts don’t hesitate to uphold this protection when circumstances warrant. And in Horne v. OptimisCorp, the Delaware courts again vindicated an officer’s broad rights to indemnification under Delaware law.

Horne arose after a nasty fight between OptimisCorp’s CEO/majority shareholder; the company’s CFO, Horne; and a number of other people involved with the company.

After the CEO was accused of sexual harassment by a female employee with whom he had a relationship, the OptimisCorp board fired him. He sued to challenge the removal, and was restored as CEO as part of a settlement. Shortly after being reinstated in early 2013, the CEO fired Horne.

Then, in mid-2013 the CEO sued Horne, the directors, and others, claiming that the charge of sexual harassment was bogus and part of a conspiracy to remove him from the company. He asserted several counts against Horne, the main one being that he aided and abetted the directors in breaching their fiduciary duties. In 2015, the Chancery Court rejected all of the claims against Horne.

In April 2016, Horne sued for mandatory indemnification under 8 Del. C. § 145(c), seeking to recover all of the legal fees and costs he spent on defending himself against the CEO’s claims. That statute provides that if an officer is “successful on the merits or otherwise” in a proceeding in which he was involved because he was an officer, the officer ‘shall be indemnified against expenses (including attorneys’ fees)’ actually and reasonably incurred.”

The company (still controlled by the same CEO) resisted in part, arguing that Horne had not been sued entirely in connection with his role as an officer, and that only part of his legal fees should be covered.

The Chancery Court had little trouble rejecting the company’s arguments. The tort and breach of fiduciary duty claims against Horne arose from his position as the company’s CFO. The company argued that its claim against Horne for breaching a stockholders’ agreement was not a claim brought “by reason of the fact” of Horne’s status as CEO, but the court disagreed. The court noted that the claim for breach was premised on Horne’s “advising the Company's counsel that the removal of Morelli as CEO would require an amendment to the stockholders agreement,” and that Horne’s advice had previously been found to be in compliance with Horne’s fiduciary duties as an OptimisCorp officer.

The Court awarded Horne all $1,797,820.22 of his legal fees and expenses. The Chancellor rejected the company’s attempt to reduce its obligation by attacking Horne’s lawyers: “The Company’s invitation to nitpick counsel’s strategic decisions in this hotly litigated case where Horne ultimately prevailed on every claim is offered with little grace.” And while some of the work of Horne’s lawyers work may have indirectly benefitted other defendants, it was done for him.

Finally, the Court also awarded Horne “fees on fees”— the amounts he expended for having to sue to vindicate his indemnification rights.

The company appealed, and on December 15, 2017, the Supreme Court of Delaware affirmed in a one-page order.

As the Horne decision shows, when a Delaware company sues its officers or directors, it needs to be aware of the possibility that it won’t just lose—it may be forced to bear their legal expenses, which could be significant. Forward-thinking officers and directors will be aware of this potential protection when choosing to serve.